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Revisiting the 4% Withdrawal Rule for Windstream Holdings Employees

Saving for your retirement from Windstream Holdings isn't always easy, but using your retirement savings wisely can be just as challenging. How much of your savings can you withdraw each year? This is an important question we often receive from many of our Windstream Holdings clients, and understandably so — withdraw too much and you run the risk of running out of money, but withdraw too little and you may miss out on a comfortable retirement from Windstream Holdings.

For more than 25 years, the most common guideline has been a rule known as the '4% rule.' This rule suggests that a withdrawal equal to 4% of the initial portfolio value, with annual increases for inflation, is sustainable over a 30-year retirement. This guideline can be helpful for Windstream Holdings employees in projecting a savings goal and providing a realistic picture of the annual income that their savings might provide. For example, a $1 million portfolio could provide $40,000 of income in the first year with inflation-adjusted withdrawals in succeeding years.

The 4% rule has stimulated a great deal of discussion over the years, with some experts saying 4% is too low and others saying it's too high. Due to the speculation, we find it important for us to analyze both the original and recent research regarding the 4% rule with our clients from Windstream Holdings. The most recent analysis happens to come from the man who invented it, financial professional William Bengen, who believes the rule has been misunderstood and offers new insights based on new research. Let's see if he's right.

Original research

Bengen first published his findings in 1994, based on analyzing data for retirements from the years 1926 to 1976 — that's 50 years of data. He considered a hypothetical, conservative portfolio comprising 50% large-cap stocks and 50% intermediate-term Treasury bonds held in a tax-advantaged account and rebalanced annually. A 4% inflation-adjusted withdrawal was the highest sustainable rate in the worst-case scenario — retirement in October 1968. This was the beginning of a bear market and a long period of high inflation. All other retirement years had higher sustainable rates, some as high as 10% or more.[1]

Of course, no one can predict the future, which is why Bengen suggested the worst-case scenario as a sustainable rate. He later adjusted it slightly upward to 4.5%, based on a more diverse portfolio comprising 30% large-cap stocks, 20% small-cap stocks, and 50% intermediate-term Treasuries.[2]

New research

Now that we have an understanding of Bengen's original research, we'd like to take a look at a more recent analysis with our clients from Windstream Holdings. In October 2020, Bengen published new research that attempts to project a sustainable withdrawal rate based on two key factors at the time of retirement: stock market valuation and inflation (annual change in the Consumer Price Index). In theory, when the market is expensive, it has less potential to grow, and sustaining increased withdrawals over time may be more difficult. On the other hand, lower inflation means lower inflation-adjusted withdrawals, allowing a higher initial rate. For example, a $40,000 first-year withdrawal becomes an $84,000 withdrawal after 20 years with a 4% annual inflation increase but just $58,000 with a 2% increase.

To measure market valuation, Bengen used the Shiller CAPE, the cyclically adjusted price-earnings ratio for the S&P 500 index developed by Nobel laureate Robert Shiller. The price-earnings (P/E) ratio of a stock is the share price divided by its earnings per share for the previous 12 months. For example, if a stock is priced at $100 and the earnings per share is $4, the P/E ratio would be 25. The Shiller CAPE divides the total share price of stocks in the S&P 500 index by average inflation-adjusted earnings over 10 years.

5% rule?

Bengen once again used historical data, this time, for over 60 years of retirement. Analyzing retirement dates from 1926 to 1990, Bengen found a clear correlation between market valuation and inflation at the time of retirement and the maximum sustainable withdrawal rate. Historically, rates ranged from as low as 4.5% to as high as 13%, but the scenarios that supported high rates were unusual, with very low market valuations and/or deflation rather than inflation.[3]

For the majority of the last 25 years, the United States has experienced high market valuations, and inflation has been low since the Great Recession.[4-5] In a high-valuation, low-inflation scenario at the time of retirement, Bengen found that a 5% initial withdrawal rate was sustainable over 30 years.[6] While not a big difference from the 4% rule, this suggests retirees could make larger initial withdrawals, particularly in a low-inflation environment. But in a high inflation environment withdrawals should decrease.

One caveat is that current market valuation is extremely high: The S&P 500 index had a CAPE of 34.19 at the end of 2020, a level only reached (and exceeded) during the late-1990s dot-com boom and higher than any of the scenarios in Bengen's research.[7] His range for a 5% withdrawal rate is a CAPE of 23 or higher, with inflation between 0% and 2.5%.[8] (Inflation was 1.2% in November 2020.)[9] Bengen's research suggests that if market valuation drops near the historical mean of 16.77, a withdrawal rate of 6% might be sustainable as long as inflation is 5% or lower. On the other hand, if valuation remains high and inflation surpasses 2.5%, the maximum sustainable rate might be 4.5%.[10]

It's important for Windstream Holdings employees to keep in mind that these projections are based on historical scenarios and a hypothetical portfolio, and there is no guarantee that your portfolio will perform in a similar manner. Also remember that these calculations are based on annual inflation-adjusted withdrawals, and you might choose not to increase withdrawals in some years or use other criteria to make adjustments, such as market performance.

Although there is no assurance that working with a financial professional will improve investment results, a professional can evaluate your objectives and available resources and help you consider appropriate long-term financial strategies, including your withdrawal strategy.

We'd like to remind our clients from Windstream Holdings that all investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid. Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss. Rebalancing involves selling some investments in order to buy others; selling investments in a taxable account could result in a tax liability.

The S&P 500 index is an unmanaged group of securities considered representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Actual results will vary.

1-2) Forbes Advisor, October 12, 2020
3-4, 6, 8, 10) Financial Advisor, October 2020
5, 9) U.S. Bureau of Labor Statistics, 2020
7) multpl.com, December 31, 2020

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Flps Must Comply With State Law and IRS Requirements

An FLP is subject to more restrictive rules than other forms of business entities. Care must be taken to create a valid FLP in the eyes of the state and the IRS. An FLP will be recognized only if it is formed for a valid business purpose. The FLP form will be disregarded if the IRS or the state finds that it was formed solely to avoid taxes.

Some specific purposes for creating an FLP include:

To adopt a family succession plan
To simplify annual gifting by the senior generation
To minimize income, gift, and estate taxes
To protect assets from potential creditors
To protect assets from waste by heirs
To consolidate assets into a single entity
To keep the business in the family
To decrease estate and probate costs

Additionally, an FLP may own a closely held business (other than a corporation that has made an election to be taxed as an 'S' corporation), real estate, marketable securities, or almost any other investment asset. Homes, cottages, or other personal use assets are normally not suitable for an FLP.

Tips For Forming And Maintaining A Valid FLP:

Have one or more substantial nontax purposes for creating the FLP, such as asset protection
Keep good records
Create the FLP while you're still in good health
Observe all legal formalities when creating the FLP and while operating the business
Hire an independent appraiser to value assets going into the FLP
Transfer legal title of assets going into the FLP
Put only business assets into the FLP — don't put any personal assets into the FLP
If you do put personal assets into the FLP, such as your home, pay fair market rent for their use
Don't commingle FLP assets and personal assets — keep them separate
Never use FLP assets for personal purposes
Keep enough assets outside the FLP to pay for personal expenses
Distribute income to partners pro rata

What are the implications of the Windstream Pension Plan for employees who wish to retire early, specifically regarding the eligibility criteria and benefit calculations that will affect their financial planning? How does Windstream address concerns for employees who may be contemplating retirement before reaching the defined Normal Retirement Age of 65?

Early Retirement and Financial Planning: Employees may retire early at age 55 with 20 or more years of service, though the pension benefit will be reduced. The reduction is by 1/180th for the first 60 months and 1/360th for each of the next 60 months that commencement precedes the normal retirement date of age 65. This ensures early retirees can still receive benefits, though at a lower amount than if they had waited until age 65(Windstream_Pension_Plan…).

In what ways does the Windstream Pension Plan protect the interests of employees during a potential plan termination? Specifically, how does the plan ensure that accrued benefits are preserved and what procedures are in place to inform employees about their rights under the Employee Retirement Income Security Act of 1974 (ERISA)?

Plan Termination Protections: In the event of plan termination, Windstream ensures all accrued pensions are fully vested. The plan assets will be used exclusively to meet accrued pension obligations before any surplus may revert to the company. Participants are also protected by the Pension Benefit Guaranty Corporation (PBGC), which guarantees most pension benefits(Windstream_Pension_Plan…).

How does Windstream determine the necessary contributions to the Pension Plan, and what role does an independent actuarial assessment play in this process? Additionally, how does this funding approach impact the overall financial stability of the Windstream Pension Plan and the benefits it promises to its participants?

Contribution Determination and Actuarial Role: Windstream’s contributions to the pension plan are determined by an independent actuary who evaluates the plan annually to recommend adjustments based on experience. This approach ensures that the plan remains financially stable and capable of meeting its promised benefits(Windstream_Pension_Plan…).

What options are available to employees of Windstream regarding the forms of pension benefit payouts upon retirement, and how do these options like the Joint and Survivor Annuities differ in terms of financial implications for both the retiring employee and their spouse?

Benefit Payout Options: Windstream offers several pension payout options, including Joint and 100% Survivor Annuity, Joint and 50% Survivor Annuity, and a 10-Year Certain and Life Annuity. These options differ in terms of the benefit reduction applied to ensure payments continue for the life of the spouse, impacting both the retiree’s and the spouse’s financial planning(Windstream_Pension_Plan…).

How should Windstream employees approach the process of claiming pension benefits, especially if their claims have been denied? What recourse is available for employees who are facing issues with their pension claim and wish to understand their rights and the appeal process?

Claiming Pension Benefits and Denied Claims: If an employee's pension claim is denied, they will receive a written notice explaining the reasons for the denial and the specific plan provisions involved. Employees may appeal the decision within 60 days, and the appeal process must be completed within 60 days of the request, with the right to file a civil lawsuit if necessary(Windstream_Pension_Plan…).

Given the frozen status of the Windstream Pension Plan, what should employees understand about their service years and how these years contribute to their pension benefits? How does Windstream communicate these rules to ensure clarity among its employees?

Service Years and Frozen Status: Since the Windstream Pension Plan is frozen, no additional benefits accrue after December 31, 2007. However, employees continue to earn years of service, which count toward eligibility for early retirement and vesting. Windstream provides clear communication through its summary plan description and resources to ensure employees understand these rules(Windstream_Pension_Plan…).

What strategies can Windstream employees employ to maximize their pension benefits and ensure they are making informed decisions about their retirement? How does Windstream support its employees in accessing the necessary resources and information to facilitate effective retirement planning?

Maximizing Pension Benefits: Employees are encouraged to consider their timing of retirement carefully, as delaying retirement closer to the normal retirement age of 65 reduces benefit reductions. Windstream supports retirement planning through its pension resources and access to Merrill Service Representatives who can assist with planning tools(Windstream_Pension_Plan…).

How does Windstream ensure that employees are aware of their obligations under the plan regarding the filing of claims and maintaining updated personal information? What measures does the company take to keep communication channels open for any inquiries or updates employees might need?

Maintaining Updated Information: Windstream emphasizes the importance of keeping personal information up to date, including changes to contact information. Employees are responsible for filing claims in a timely manner, and failure to do so may result in delays or forfeiture of benefits(Windstream_Pension_Plan…).

In the event of the death of a vested Windstream employee, what benefits are guaranteed to eligible spouses under the plan, and how do survivors initiate the process for claiming these benefits? What steps should surviving spouses take to ensure they receive the necessary support and information from Windstream?

Survivor Benefits and Claim Process: In the event of the death of a vested employee, the spouse is entitled to receive a pre-retirement survivor annuity, which may start on or after the employee’s earliest retirement age. The spouse must contact Windstream to initiate the claim process and may receive a lump sum if the benefit’s present value is below certain thresholds(Windstream_Pension_Plan…).

How can Windstream employees reach out to the companyâ€™s Benefits Committee or Plan Administrator for detailed inquiries about their pension benefits? What contact methods are available, and what information should employees prepare to facilitate effective communication regarding their pension inquiries? These questions will help employees navigate the complexities of the Windstream Pension Plan and ensure they are well-informed as they approach retirement.

Reaching the Benefits Committee: Windstream employees can contact the Benefits Committee or Plan Administrator at Windstream Services, LLC in Little Rock, Arkansas, or via the Merrill Service Center at 1-800-228-4015. Employees should have relevant information, such as personal and employment details, ready to facilitate efficient communication(Windstream_Pension_Plan…).